The Effect Of Inflation, Foreign Direct Investment, And Labor Force On Indonesia’s GDP Growth From 1990 To 2024

Abstract

This study analyzes the long-run and short-run effects of foreign direct investment (FDI), inflation, and labor force on Indonesia’s GDP growth over the period 1990–2024 using an Error Correction Model (ECM). Annual time series data for GDP growth, consumer price inflation (CPI), FDI net inflows, and labor force were obtained from the World Bank. Unit root tests show that all variables are stationary at first difference, while Johansen cointegration tests confirm the existence of two cointegrating relationships among the variables. The long-run ECM estimates indicate that inflation significantly reduces economic growth, whereas FDI significantly promotes growth; the labor force has a negative and significant effect in the long run. In the short run, inflation still exerts a significant negative impact, FDI maintains a significant positive effect, while the labor force has no influence and is not statistically significant. The error correction term is negative and highly significant, suggesting a rapid adjustment toward long-run equilibrium. These findings highlight the importance of maintaining price stability and attracting productive FDI, while simultaneously improving the quality and absorptive capacity of the labor force to sustain Indonesia’s economic growth.